Monday, March 13, 2017

UMW Holdings : UMW-Sime Darby Motor consolidation on the table? HOLD

STOCK FOCUS OF THE DAY

UMW Holdings : UMW-Sime Darby Motor consolidation on the
table? HOLD

The Edge Weekly reported that Permodalan Nasional Bhd (PNB)
is looking at the possibility of merging UMW Holdings (UMW) and Sime Darby's
(Sime) motor division. PNB is the biggest shareholder in UMW and Sime with a
stake of 58.19% and 51.9% respectively. UMW makes and distributes Toyota cars
with 51%-owned UMW Toyota Motor, which also distributes Lexus. It is also the
largest shareholder in Perodua with a 38% stake. Toyota and Perodua together
accounted for 46% of last year's TIV with 217K in total sales. Sime's motor
division is a more diversified one and carries both mid-range (Hyundai and
Ford) and luxury (BMW, Land Rover, Porsche, Jaguar) names. The two key segments
are Assembly (certain models of BMW, Land Rover and Hyundai are built in
51%-owned Inokom) and Distribution (it imports and distributes brands including
BMW, MINI, Rolls-Royce, Porsche and Mitsubishi for a number of Asia-Pacific
markets). It sold a total of 83K units in its FYE June 2016.

Both UMW and Sime's auto businesses are currently profitable,
although profitability and margins have taken a beating from the current
downturn. UMW's auto segment made a revenue of RM8.5bil and net profit of
RM301mil in FY16, while Sime's motor segment made a revenue of RM19.4bil and
PBT of RM537mil in the same period. The main challenges for a merged entity
would be to find cost and operational synergies, and avoid cannibalisation. The
goal would be to maximise utilisation, save on development costs and use a
single entity to cater to several distinctive market segments. We retain a HOLD
call and SOP-based fair value of RM5.20 on UMW. It is in the process of
dispensing its O&G businesses via the demerging of UMWOG (by end-2Q) and
disposal of unlisted O&G assets by the end of this year.